Steel prices: How we got here and what could happen

For more than 100 years, the federal government has been implementing quotas or tariffs on imported steel to support domestic steel producers. Historically, government action in the steel market arises in times of low steel prices as a means of supporting steel producers and marketed for political purposes to attract support from voters, particularly in the Rust Belt. As a result, steelmaking jobs might have been saved, but a far greater number of jobs in steel-consuming industries, including the metal fabrication sector, were lost. As with any tariff and quota action, the U.S. economy typically sees a net loss in jobs.

President George W. Bush’s steel tariffs began as a campaign promise to steelworkers in West Virginia. Tariffs ranging from 8% to 30% were established by the Bush administration in March 2002 and were intended to last for three years. At the time steel prices were at a historically low level in the U.S. The tariffs were not imposed on all imported steel and were not imposed on all countries exporting steel to the U.S. For example, Canada and Mexico were excluded because of NAFTA concerns and other countries, such as Argentina and Turkey, were exempted.

What started as a three-year tariff program was abandoned after 22 months because of the World Trade Organization’s decision that the U.S. was in violation of a WTO agreement and a threat from the European Union to impose new tariffs on U.S.-sourced goods.

The overall economic impact of the tariffs in the U.S. was a jobs killer. Although the steel industry added about 3,500 jobs, the rest of the manufacturing sector shed an estimated 200,000 jobs, some of which were related to manufacturers leaving the U.S. to secure lower-cost steel.

The lesson learned here is that steel tariffs are driven by politics and that economics only matters to the extent it is impacting politics.

The Steel Market in 2017

To better understand the current steel market, it is helpful to look at what happened in 2017, the year before the 25% tariff on imported steel was imposed.

In 2017 nine operating integrated steel mills were left in the U.S., and they accounted for 32% of steel production. Integrated mills use iron ore as the primary raw material and blast furnaces to produce it. The remaining 68% of U.S. steel production was made in more than 100 mini-mills that use electric arc furnaces to melt iron and steel scrap to produce steel. Over the last few decades, mini-mills have increased their share of U.S. steel production at the expense of integrated steel mills. Mini-mills do not require the same capital outlay to start up, and their operating costs are much lower when compared to the integrated steel mills because of their production efficiencies. The U.S. has the most mini- mills of any country in the world, and our leadership in this area is impressive given that 75% of total world steel production is made using blast furnaces.

In 2017 the U.S. produced 81.6 million metric tons of steel and imported 34.6 million metric tons of steel from 80 countries and territories. If you exclude 2009, the year of the Great Recession, the level of steel imports in 2017 was just slightly above the average amount imported since 2005. Also in 2017 China was the 10th- largest exporter of steel to the U.S., accounting for only 2% of our imported steel. (Canada, Brazil, and Mexico were the top three.) This is remarkable because China produces one-half of all the steel made in the world, and it shows the effectiveness of the various trade restrictions that were already in place to address imported Chinese steel. For instance, up until that time, the U.S. had installed 16 antidumping duties and 12 countervailing duties against China.

In December 2017, Congress passed the Tax Cut and Jobs Act of 2017. Anticipation of this fiscal stimulus, which was in development throughout 2017, helped propel the Dow Jones Industrial Average to a 21.3% gain for the year as well as boost U.S. steel prices to a level near their five-year high. With this economic stimulus package in place, then President Donald J. Trump and his administration were well-positioned economically to tackle imported steel, a subject that was part of the election campaign.

President Trump’s Steel Tariffs

In March 2018 Trump announced that he was imposing a 25% tariff on all imported steel and a 10% tariff on all imported aluminum from most countries. In June, Canada, Mexico, and the European Union were added to the target list. This action was marketed as part of the administration’s America First economic policy to reduce the U.S. trade deficit, which in 2017 was nearly $800 billion in goods (excludes services).

A combination of increased demand and lack of supply has helped to drive up hot- rolled steel coil prices to more than $1,600/ton in May. Removing the Section 232 tariffs on imported steel and aluminum would provide price relief for steel consumers. Getty Images.

Given Bush’s experience with steel tariffs, Trump’s intent to go down this same road intrigued me. Why do this when, other than for steel producers, there is such uniformly widespread opposition among economists and the business community for such tariffs? The National Taxpayers Union sent a letter to President Trump signed by over 1,100 economists urging him to reconsider his tariff plans. The University of Chicago surveyed 43 of the top economists and not a single one said the tariffs would be a net positive for Americans. Even the Aluminum Association, the trade association for aluminum producers, came out against the tariffs because of concerns over how this would impact their customers, which is probably why their industry received only a 10% tariff on imported aluminum rather than the 25% tariff imposed on imported steel.

Trump’s interest in steel may have had something to do with his relationship with Wilbur Ross, Trump’s U.S. secretary of commerce. To apply Section 232 tariffs on steel, the Commerce Department needed to undertake a review of the steel market and conclude that the amount of imported steel threatened to “impair national security” (a weak case at best because only 3% of domestically produced steel is used by the federal government for defense purposes). Well, that is what they concluded.

It turns out that Ross and Trump have a long history. In 1990 the bondholders of Trump’s Taj Mahal casino hired Ross to represent their interests when the casino was struggling to make bond payments. The prepacked bankruptcy deal Ross worked out created better terms for Trump on the debt and kept Trump in control in exchange for giving up a large portion of his stock in the casino. Years later Ross formed International Steel Group to acquire largely bankrupt integrated steel mills in the U.S., namely Bethlehem Steel, LTV Steel, and Acme Steel, which he ultimately sold to Mittal in 2005 for $4.5 billion. (Mittal evolved into ArcelorMittal, headquartered in Luxembourg, and is now the largest steel producer in the world.) ArcelorMittal later put Ross on its board of directors, until Trump named Ross his secretary of commerce. I’m not concluding there was malfeasance here or even implying it, just that this history makes for a nice coincidence. After all, domestic steel producers need to be economically viable too.

Steel Tariffs Start a Global Trade War

Although the 25% tariff on imported steel initially had the desired effect of increasing the steel price, it also had detrimental effects. It created an unprecedented spike in the cost of steel in the U.S. when compared to the rest of the world. It also started a global trade war.

Initially, increased economic activity from the December 2017 fiscal stimulus softened the blow of the steel price increase. However, such a large premium led some steel consumers to change their buying habits. (Some companies looked at material substitution, and others moved steel product purchases outside the U.S. to avoid higher material costs.) These events and a growing trade war that dampened manufacturing activity caused the domestic price for steel to fall in the summer of 2018 and continuing throughout 2019. In fact, during the second half of 2019, the manufacturing sector entered a recession with falling production. In November 2019 the Institute for Supply Management’s index of U.S. factory activity recorded its lowest reading in more than 10 years!

By year-end 2019, the price of steel in the U.S. was below pre-tariff levels even though the steel tariffs remained in place everywhere in the world except for Canada and Mexico and a few countries that had agreed to import quotas. This resulted in some steel production cutbacks and the outright announced closure of some steel mills, like U.S. Steel’s Great Lakes Works, months before COVID impacted the U.S. economy.

The Perfect Storm Creates Record-high Steel Prices

The current record-high steel prices are the result of a perfect storm. Steel tariffs reduced the amount of imported steel coming into the U.S., and some steelmakers shut down production last spring during the start of the pandemic. Then the U.S. government poured stimulus money into the country to pull the economy out of the COVID-19 doldrums.

The steel tariffs did have the desired effect of reducing the amount of steel coming into the U.S. In 2020 the U.S. imported 22 million metric tons of steel, which was roughly 30% lower than in 2018. In the first two months of 2021, steel imports were down another 7.5% when compared to the same period last year.

Unfortunately, domestic production isn’t offsetting the drop in imported steel. In February 2020 domestic steel production was around 1.9 million metric tons per week. By May it had fallen roughly 37%, hitting bottom at an average of 1.2 million metric tons per week. For the rest of 2020, steel production slowly and steadily climbed, closing the year at around 1.6 million metric tons per week. In April it averaged 1.75 million metric tons per week, which was still 8% below pre-COVID levels.

To offset the drag on the U.S. economy from the pandemic, Congress passed six major bills, costing about $5.3 trillion, in the 12 months since March 2020. Construction and the manufacturing sectors, where virtually all steel is consumed, are significant beneficiaries from this spending as they bounced back more quickly than other sectors such as travel, leisure, sports, entertainment, and even health care. The $5.3 trillion total is a lot of money in relation to the size of the U.S. economy ($20.3 trillion), the size of the manufacturing sector (slightly more than $2 trillion), and the size of the construction sector ($1.3 trillion). It doesn’t take much of a boost to these two sectors to make a sizable impact on the demand for steel.

The increasing demand for steel and reduced supply from lower domestic production and steel imports have reduced the inventory of steel on hand, resulting in its current sky-high price. For example, the June 2021 contract for steel has increased 185% from $568/ton last September to $1,620/ton in May. Steel is priced far above both the 2008 and 2018 peaks and is in the worst shape, from a supply basis, since at least the 1970s! Similar dynamics are at play in other critical raw material markets that were and still are subject to additional import tariffs from the previous administration. Prime examples are lumber and aluminum.

What Happens Next?

Will we see Congress and the Biden administration reach an epiphany regarding the wisdom of these tariffs on imported raw materials? This could easily happen in the next few months. Critical raw materials such as steel and lumber are in such short supply that they are creating severe disruptions in the manufacturing and construction sectors, as well as adding to inflationary pressures. This situation isn’t going to help the current administration’s objective of investing in infrastructure projects, which require large amounts of materials. The good news is that ending the tariffs is an easy thing to do. All it takes is one stroke of the president’s pen to order the end of them.

The tariffs were marketed to the American people as a way to reduce the merchandise trade deficit. The problem is, it didn’t. The trade deficit in goods (excluding services) was $750 billion in 2016; it increased 22% to $915.8 billion in 2020. In March the trade deficit set an all-time high monthly record.

Just as economists said, these tariffs on raw materials are bad public policy. What’s the justification to continue with them when the price for steel is at an all-time high? There isn’t any as they aren’t needed.

Looking at the steel futures market, as of mid-May it indicated yet higher prices for steel until October. Steel service center inventory levels are at historic lows, and mill lead times are double what they were a few years ago. If eliminated tomorrow, the steel tariffs would provide a psychological boost to dampening the steel price, but because of time lags, the removal of them likely wouldn’t improve steel supply for several more months.

Finally, the steel tariffs because of how they were conceived—placed only on imported raw material and not on fabricated metal products—are a disaster for U.S. producers of fabricated metal products, the fifth-largest sector of the manufacturing segment of our economy. Not only does our industry have to contend with the record cost of steel, but also with global competitors that have access to lower-cost materials. Our customers are not stupid, they know this, and it forces fabricators into a position of deciding how much of this cost to pass on to the customer. Passing along too little of the increased costs creates operating losses and destroys capital in our business. Pass along too much and watch our customers move their purchases to suppliers outside the U.S.

The tariffs are bad, too, for the long-term future of U.S. steel mills. If the industry isn’t careful, the only one left standing to buy their steel will be our federal government for public works projects because everyone else using steel will have left the U.S.!